German recession fears weigh on markets

The rally in stock markets ground to a halt Wednesday as hopes of a recovery in the U.S. economy were offset by concerns that Germany was heading back into recession.

Germany's Federal Statistics Office suggested that Europe's biggest economy likely contracted by 0.25 percent in the last quarter of 2011 as the country suffers from the fallout of the debt crisis that's afflicting the 17-country eurozone.

If Germany's economy did actually shrink and does so again in the first quarter of 2012, it would officially be in recession. That would be an ominous sign for Europe, considering Germany has been the strongest-performing economy during the region's two-year debt crisis.

Concerns over the German economy and further sovereign debt problems across the 17 countries that use the euro sent the single currency down 0.5 percent to $1.268.

Stock markets have mostly risen this year, largely on optimism over the recovery in the U.S. as well as hopes that Chinese authorities will ease monetary policy.

"Global equities have swung toward losses for the day as optimism in the U.S. economy and speculation of easing in China give way to pessimism in Europe after news that the German economy likely contracted in the final quarter of 2011," said Carl Campus, an analyst at BMO Capital Markets.

In Europe, the FTSE 100 index of leading British shares closed down 0.5 percent at 5,670.82 while Germany's DAX fell 0.2 percent to 6,152.34. The CAC-40 in France ended 0.2 percent lower at 3,204.83.

The euro remained volatile, falling to a new 16-month low of $1.2674 at one stage after a leading Fitch Ratings analyst said the European Central Bank had to do much more to save the euro. By late afternoon London time, it was back around the $1.27 mark.

Over the rest of the week, Europe's debt crisis will likely be at the forefront of investors' minds, especially as Italy is due to raise substantial amounts of money.

Italy is the epicenter of Europe's debt crisis. Though it has a relatively low budget deficit in comparison to its economy, the country is saddled with massive amounts of debt. Fitch has said there was a "substantial" chance that it would be downgrading its rating on the country's debt by the end of this month.

Italy's financial trouble's escalated in recent months as investors demanded increasingly high interest rates to lend it money. The yield on the country's ten-year bonds continues to hover around the 7 percent mark that is widely considered to be unsustainable.

In an interview with Germany's Die Welt newspaper ahead of his meeting with German Chancellor Angela Merkel, Italy's Prime Minister Mario Monti said he wanted to see more concrete support in exchange for having passed painful austerity measures.

Some economists say the European Central Bank should help Italy more by buying its government bonds on the open market in larger quantities. That would lower Italy's borrowing rates and ease pressure on its finances. But the ECB, along with Germany, resists such a move.

The ECB will hold its monthly policy meeting on Thursday but most economists expect it to keep interest rates steady.

Another key focus in the debt crisis is Greece's talks with private creditors about having them take a 50 percent cut in their Greek bondholdings. That demand is considered crucial to reducing Greece's enormous debt load, and Merkel has indicated that Greece would not get any more rescue loans until that deal is clinched. A deal is expected by next week, according to Greek officials.

Earlier in Asia, financial markets closed mostly higher on expectations that China will tweak its monetary policy to encourage growth, but in a limited way to prevent inflaming its already sizzling property market.

However, mainland Chinese shares edged lower as traders booked profits following two days of sharp gains. The benchmark Shanghai Composite Index lost 0.4 percent while the Shenzhen Composite Index was marginally lower at 880.71.

Oil prices tracked equities slightly lower _ benchmark crude for February delivery lost $1.20 to $101.04 per barrel in electronic trading on the New York Mercantile Exchange.